Moody’s Ratings is downgrading the insurance industry’s credit outlook to negative as elevated medical costs continue to batter payers.
Moody’s analysts noted in a report that spending in the commercial market alone is set to increase by 8% this year, the fastest rate recorded in 13 years. Spending in the individual market, meanwhile, is set to climb by 7.5%, another increase that’s higher than in recent years.
Factors driving these spending hikes include inflation, prescription drug spending and higher utilization of behavioral health. Based on those trends, Moody’s projects spending in Medicare Advantage (MA) will also increase by between 5% and 7%.
“We are changing our outlook on the health insurance sector to negative from stable,” the Moody’s analysts wrote. “Although we expect EBITDA growth to remain in the low single digits, insurers will continue to grapple with medical costs in excess of reimbursement rates for MA and Medicaid, while commercial coverage also faces continued high medical costs.”
The researchers noted that premium increases are not likely to offset the increase in spending, especially given competitive pressures around contract negotiations with providers in the commercial market. Medicare and Medicaid plans can more nimbly make benefit changes to mitigate spending increases, but they’re also unlikely to fully shrug off these cost hikes, according to the report.
Another factor to consider is the ongoing conversation on the Hill about the pharmacy benefit management industry, and that scrutiny could be credit negative for the companies that operate the big three PBMs: CVS Health, UnitedHealth Group and Cigna.
For example, the Patients Before Monopolies Act, which has bipartisan support, would bar the parent company of a PBM from also owning a pharmacy business, dealing a significant blow to these companies if it were passed and signed into law.
There is also plenty of uncertainty around the Trump administration and the approach it may take to Medicare, Medicaid and other regulations governing the insurance industry, the analysts said.
A bright spot for 2025 is likely enrollment growth, according to the report. Medicaid enrollment will likely remain flat now that redeterminations have been completed, and MA and the individual market are set to grow.
The analysts said the outlook could return to stable if cost trends moderate and the regulatory environment proves to be “benign,” including an extension of premium subsidies for Affordable Care Act expansion plans. Further push into value-based models and digital solutions will also be a driver of a more stable credit outlook.